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Domain Holdings Australia Limited (ASX:DHG) has announced that it will pay a dividend of A$0.04 per share on the 11th of September. This makes the dividend yield 2.1%, which will augment investor returns quite nicely.
View our latest analysis for Domain Holdings Australia
Domain Holdings Australia's Earnings Easily Cover The Distributions
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Domain Holdings Australia was paying out 87% of earnings, but a comparatively small 47% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Over the next year, EPS is forecast to expand by 71.4%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 52% which would be quite comfortable going to take the dividend forward.
Domain Holdings Australia's Dividend Has Lacked Consistency
It's comforting to see that Domain Holdings Australia has been paying a dividend for a number of years now, however it has been cut at least once in that time. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The annual payment during the last 7 years was A$0.08 in 2017, and the most recent fiscal year payment was A$0.06. Doing the maths, this is a decline of about 4.0% per year. A company that decreases its dividend over time generally isn't what we are looking for.
Dividend Growth Could Be Constrained
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Domain Holdings Australia has impressed us by growing EPS at 53% per year over the past five years. Earnings per share is growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why Domain Holdings Australia is not retaining those earnings to reinvest in growth.
Our Thoughts On Domain Holdings Australia's Dividend
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would probably look elsewhere for an income investment.